Course Project: Corporate Consolidation Project…

Course Project: Corporate Consolidation Project″>Objectives |″>Guidelines |″>Grading”>Back to”>Back to TopThe
objective of the Corporate Consolidation Project is to provide students
with an in-depth, hands-on experience examining a real-world scenario.
Students will address the following primary areas.Using
actual financial results for the recently completed year and a set of
assumptions, forecast proposed parent company financial results for the
upcoming year assuming the acquisition is not attempted.Develop
a set of revised, forecasted, separate financial statements for the
parent company that reflect the proposed acquisition.Prepare a pro forma consolidation worksheet for the parent company and its proposed subsidiary.Perform ratio analysis based on (1) the separate financial statements and (2) the consolidated financial statements.Articulate
findings, conclusions, and a recommendation in a memorandum to the
chairperson of the parent company’s acquisition”>Back to TopThe Course Project is to be done by each student. The project is to solve a Case Study, which is listed below.There are three topics in each letter group that correspond to the three required milestones.Milestone 1—Required 1—due Week 3 (30 points)Milestone 2—Required 2 and 3—due Week 5 (70 points)Milestone 3—Required 4 and 5—due Week 6 (50 points)The
team will choose a leader to be responsible for posting the team’s
document(s) to that person’s Dropbox for the appropriate week. In
addition to the private discussion areas, teams have private Doc Sharing
and e-mail to facilitate project activities. Only one team submission
is to be made; each person does not submit his or her own milestone.Please
note: Any communication that occurs outside the Team Café will not be
visible to me; thus, it will not earn you points towards the individual
participation component of each milestone’s grade.Although this
is a group project, it is required that each team member play a
meaningful role in completing each milestone. You should review the
grading rubric found at the bottom of the page, because it will be used
to grade each submission and individual participation component of each
milestone. Each team member will receive a separate grade dependent on
both the submission and his or her participation. Note also that
participation in the team topic does not count toward your required
weekly discussion log-ins and posts, but it will count toward your
individual team grade.DropboxFor instructions on how to use the Dropbox, read these″>step-by-step instructions or watch this Tutorial″>Dropbox Tutorial.Once
you have been assigned to a group, go to the e-mail tool and note the
group number or name in the address box. If you click on the group, then
“add,” you will see the names of your group members in the box. Go
ahead and send an e-mail to say hello to your teammates and tell them a
bit about yourself. At the bottom of the left side of your
screen, under the Week 8 content item, you will find a Team Café, and if
you click on this, you will see a Discussion area for your team. This
Discussion area will be open for the entire duration of the course, so I
highly recommend that you keep your conversation with your team in this
area. You will not be inundated with e-mails during the course, and you
will not have to archive these to keep track of who is doing what.Teams
are to begin working on Milestone 1 using your team topic in Team
Café—see the Course Project Guidelines in Doc Sharing for specifics.
Also, please let me know if you have not heard from a member of your
group early in the course.Good luck and enjoy!”>Back to TopParent
Inc. is contemplating a tender offer to acquire 80% of Subsidiary
Corporation’s common stock. Subsidiary’s shares are currently quoted on
the New York Stock Exchange at $85 per share. In order to have a
reasonable chance of the tender offer attracting 80% of Subsidiary’s
stock, Parent believes it will have to offer at least $105 per share. If
the tender offer is made and is successful, the purchase will be
consummated on January 1, 2013.A typical part of the planning of
a proposed business combination is the preparation of projected or pro
forma consolidated financial statements. As a member of Parent’s
accounting group, you have been asked to prepare the pro forma 2013
consolidated financial statements for Parent and Subsidiary assuming
that 80% of Subsidiary’s stock is acquired at a price of $105 per share.
To support your computations, Martha Franklin, the chairperson of
Parent’s acquisitions committee, has provided you with the projected
2013 financial statements for Subsidiary. (The projected financial
statements for Subsidiary and several other companies were prepared
earlier for the acquisition committee’s use in targeting a company for
acquisition.) The projected financial statements for Subsidiary for 2013
and Parent’s actual 2012 financial statements are presented in Table”>Back to TopMs. Franklin has asked you to use the assumptions below to project Parent’s 2013 financial statements.Sales will increase by 10% in 2013.All sales will be on account.Accounts receivable will be 5% lower on December 31, 2013, than on December 31, 2012.Cost of goods sold will increase by 9% in 2013.All purchases of merchandise will be on account.Accounts payable is expected to be $50,500 on December 31, 2013.Inventory will be 3% higher on December 31, 2013, than on December 31, 2012.Straight-line depreciation is used for all fixed assets.No fixed assets will be disposed of during 2013. The annual depreciation on existing assets is $40,000 per year.Equipment
will be purchased on January 1, 2013, for $48,000 cash. The equipment
will have an estimated life of 10 years, with no salvage value.Operating expenses, other than depreciation, will increase by 14% in 2013.All operating expenses, other than depreciation, will be paid in cash.Parent’s
income tax rate is 40%, and taxes are paid in cash in four equal
payments. Payments will be made on the 15th of April, June, September,
and December. For simplicity, assume taxable income equals financial
reporting income before taxes.Parent will continue the $2.50 per share annual cash dividend on its common stock.If
the tender offer is successful, Parent will finance the acquisition by
issuing $170,000 of 6% nonconvertible bonds at par on January 1, 2013.
The bonds would first pay interest on July 1, 2013, and would pay
interest semiannually thereafter each January 1 and July 1 until
maturity on January 1, 2023.The acquisition will be accounted
for as a purchase and Parent will account for the investment using the
equity method. Although most of the legal work related to the
acquisition will be handled by Parent’s staff attorney, direct costs to
prepare and process the tender offer will total $2,000 and will be paid
in cash by Parent in 2013.As of January 1, 2013, all of
Subsidiary’s assets and liabilities are fairly valued except for
machinery with a book value of $8,000, an estimated fair value of
$9,500, and a 5-year remaining useful life. Assume that straight-line
depreciation is used to amortize any revaluation increment.No
transactions between these companies occurred prior to 2013. Regardless
of whether they combine, Parent plans to buy $50,000 of merchandise from
Subsidiary in 2013 and will have $3,600 of these purchases remaining in
inventory on December 31, 2013. In addition, Subsidiary is expected to
buy $2,400 of merchandise from Parent in 2013 and to have $495 of these
purchases in inventory on December 31, 2013. Parent and Subsidiary price
their products to yield a 65% and 80% markup on cost, respectively.Parent
intends to use three financial yardsticks to determine the financial
attractiveness of the combination. First, Parent wishes to acquire
Subsidiary Corporation only if 2013 consolidated earnings per share will
be at least as high as the earnings per share Parent would report if no
combination takes place. Second, Parent will consider the proposed
combination unattractive if it will cause the consolidated current ratio
to fall below two to one. Third, return on average stockholders’ equity
must remain above 20% for the combined entity.If the financial
yardsticks described above and the nonfinancial aspects of the
combination are appealing, then the tender offer will be made. On the
other hand, if these objectives are not met, the acquisition will either
be restructured or abandoned.Table”>Back to TopParent Inc. Actual Financial Statements for 2012 and Subsidiary Corporation Projected Financial Statements for 2013Parent 2012 ActualSubsidiary 2013 ProjectedSales$800,000$100,000Cost of goods sold(485,000)(55,000)Operating expenses(219,000)(10,000)Income before taxes96,00035,000Income tax expense(38,400)(14,000)Net income57,60021,000Retained earnings, January 123,00014,500Add; net income57,60021,000Less: dividends(38,000)(7,000)Retained earnings, December 3142,60028,500Cash36,20019,500Accounts receivable39,00013,000Inventory26,00012,000Property, plant, and equipment673,000213,000Accumulated depreciation(490,000)(28,000)Total assets284,200229,500Parent 2012 ActualSubsidiary 2013 ProjectedAccounts payable44,60021,000Common stock *190,000150,000Paid-in capital in excess of par7,00030,000Retained earnings42,60028,500Total liabilities and stockholders’ equity284,200229,500* Parent: $12.50 par; Subsidiary: $75”>Back to TopMilestoneDueRequirements1 (30 points)Week 3Forecast
the separate financial statements of Parent Inc. Using Ms. Franklin’s
assumptions and Parent’s 2012 financial statements, prepare pro forma
2013 financial statements for Parent Inc., assuming that the acquisition
is not attempted. Support your statements with appropriate work papers
and journal entries. Pro forma financial statements include a statement
of operation, a statement of retained earnings, a balance sheet, and a
cash flow statement.NOTE: There is a–Course_Project_Milestones_1_and_2_Template.xlsx”>Template for Milestones 1 and 2 available for your download that is also located in Doc Sharing.2 (70 points)Week 5Adjust
the separate financial statements of Parent Inc. to reflect the
proposed acquisition. Adjust Parent’s pro forma 2013 financial
statements prepared in Milestone 1 to reflect the proposed acquisition
(i.e., adjust Parent’s forecasted financial statements for bond
issuance, stock purchase, income from subsidiary, etc.). Support your
statements with appropriate work papers and journal entries. Pro forma
financial statements include a statement of operation, a statement of
retained earnings, a balance sheet, and a cash flow statement.Prepare
a pro forma consolidated worksheet. Prepare a pro forma consolidation
worksheet for Parent Inc. and its proposed subsidiary as of December 31,
2013. To ensure you are starting with the right numbers, use the
solution provided to Milestone 1 for the adjusted pro forma 2013
financial statements of Parent Inc., and the projected 2013 financial
statements of Subsidiary Corporation in Table 1. Show all consolidation
adjusting entries, including minority interest entries.NOTE: There is a–Course_Project_Milestones_1_and_2_Template.xlsx”>Template for Milestones 1 and 2 available for your download that is also located in Doc Sharing.3 (50 points)Week 6Perform
ratio analysis. Compute earnings per share for (1) the separate
financial statements of Parent Inc. prepared in Milestone 1 and (2) the
consolidated financial statements contained in the solution for the pro
forma consolidation worksheet prepared in Milestone 3. Also, calculate
current ratio and return on average stockholders’ equity for the
separate company and consolidated financial statements.Write a
memorandum (as a Word document) to Ms. Franklin summarizing the results
of your analysis, including a summary of the financial ratios you
computed and your recommendation. Attach copies of both sets of pro
forma financial statements of Parent Inc. and the pro forma
consolidation worksheet.

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